A home equity loan, often referred to as a second mortgage, allows you to borrow money for large expenses or to consolidate debt by leveraging the available equity in your home. Your home equity is based on the difference between the appraised value of your home and your current balance on your mortgage. For example, if the value of your home is appraised at $200,000 and you still owe $150,000 on your mortgage, your available equity is $50,000.
Benefits and advantages of a home equity loan
A home equity loan can be a good option if you need to cover large expenses associated with home renovations, college tuition, consolidating debt, or other types of major expenses. Because you can borrow against the value of your home, a home equity loan may also be easier to qualify for than other loans because the loan is secured by your house.
Home equity loans typically carry fixed interest rates that are often lower than credit cards or other unsecured consumer loans. In a changing rate environment, a fixed rate loan can provide simplicity in budgeting, because your monthly payment amount remains the same over the life of the loan and will never increase.
The amount you borrow with a home equity loan is provided to you in one lump sum. This offers you flexibility to cover large expenses. You pay back the loan amount with regular monthly payments that go toward accrued interest and principal for the agreed-upon number of years. Just remember, a home equity loan must be paid in full if your house is sold.
A tax deduction may be available for the interest you pay on a home equity loan if the loan was used specifically for home renovations. We encourage you to consult a tax professional or visit irs.gov for more information.
Is a home equity loan right for me?
If you are a responsible borrower with a steady, reliable income, a home equity loan can be a great option because it offers flexibility in what costs it can help cover, especially with larger expenses. There may also be rate and fee benefits.
As you consider your loan options, you may come across a Home Equity Line of Credit (HELOC). Home equity loans are often used interchangeably with HELOCs. While both loans offer flexibility in the type of expenses it can cover, with a HELOC, you are approved for a maximum loan amount, and only withdraw what you need, similar to a credit card. A HELOC also tends to have variable interest rates, which means your monthly payment may increase or decrease if the rate index increases or decreases. Read more about the difference between a home equity loan and HELOC.